The Ultimate Guide to Safe Withdrawal Rates – Part 16: Early Retirement in a Low-Return World (and why we don’t worry about Jack Bogle’s return prediction)

A while ago I read that Jack Bogle predicts that equities will return only 4% over the next decade. And that already includes dividends and it’s nominal, not real! People call me pessimistic with my equity return assumption for stocks, but good old Jack takes it down another notch. Here’s the quote, reproduced on CNBC:

“Just for mathematical reasons, the dividend yield is 2 percent, a little under 2 percent in fact, and the long-term dividend yield on stocks is pretty close to 4 … the earnings growth on stocks has been a little over 5, that’s going to be a very tough target in the future so let’s call it 4 … 4 and 2 percent give you a 6 percent investment return, but then you have to take … the valuations in the market. …You take that 6 percent return and maybe knock it off a couple of points perhaps for a lower valuation, slightly lower valuation over a decade and you’re talking about a 4 percent nominal return on stocks. And that’s low, lower than history. History is around 6 and a half.”

Wow! That’s a bummer: 4% nominal means about 2% real with a generally agreed upon 2% annual inflation rate. Or another way to look at this return prediction: If we assume that equities pay around 2% in dividend yield, then the equity price index will go up by only the rate of inflation. For ten years!

Everyone in the FIRE community should take notice. If you’re still in the accumulation phase you’ll likely need longer to reach FIRE. If you’re already retired and apply the good old 4% Rule then a Bogle-style scenario will likely put some strain on your portfolio. So, in today’s post let’s look at what the Bogle scenario means for Safe Withdrawal Rates in Early Retirement.

How crazy is Bogle’s prediction?

One little pet peeve I have with Bogle’s analysis: When he says “History is around 6 and a half” he seems to confuse real and nominal returns. Whether you take returns since 1871 (as we do) or 1926 (as they do in the Trinity Study), the average real total equity return has been about 6.7%. So, a 4% nominal return minus 2% expected inflation is a whopping 4.7% p.a. below and not just slightly below historical average.

But Bogle’s assumption is not crazy at all. The current Shiller CAPE is about 30, so according to my personal rule of thumb, this translates into an expected real return of 3.3% (=1/CAPE), but with some substantial uncertainty around it. Taking off another 1.3% safety margin and you’re right at Bogle’s estimate. In fact, if I had to pick among the two widely cited “crazy predictions,” 4% from Bogle and the 12% estimate from Dave Ramsey, I’d try my luck with the Vanguard guy!

What do we do now?

Are we all screwed now? Should we delay our Early Retirement? Run for the hills, sell stocks and go into bonds? Hold your horses! Just like Oracles from Ancient Greece, this Oracle of Valley Forge (Vanguard Headquarters) made a prediction with a lot of ambiguities. Even if we take the 4% prediction at face value, notice the two extremely important pieces of information Bogle didn’t elaborate on:

  1. What are his return expectations for year 11 and onward?
  2. 4% annual returns implies a cumulative compound return of about 48% in year 10. But what’s the path for equities in between? As we have learned from our research on Sequence of Return Risk (see part 1 and part 2), in retirement, the average return is much less important than the order/sequence of returns.

So, let’s look at the two issues:

1: What comes after year 10?

Notice what Bogle didn’t say: He didn’t say that the 4% return will persist beyond year 10. The way I interpret Bogle’s quote is that the next 10 years are merely an adjustment process. We have slightly lofty equity valuations and that underwhelming equity return will bring equity valuations back to normal. This view would be supported by that other oracle, the one from Omaha who had this to say last year:

“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”     Warren Buffett in 2016 letter to Berkshire Hathaway shareholders.

So, my interpretation of Bogle’s quote is that the 4% return assumption is only temporary, not permanent. Let’s assume that the Price index grows by only 2% (4% minus dividend yield) and profits keep growing at just 4%, i.e., about in line with nominal GDP. Historically, nominal GDP grew faster than that and profits grew even a little bit faster than nominal GDP, but let’s be conservative here. As the profits starting point, we use the $105.52 EPS figure from S&P for the second quarter of 2017 (estimate as of 6/6/2017). I also use a 2429.33 S&P level from yesterday’s (June 6, 2017) close.

Equity valuations will look quite attractive again after 10 years, see the table below. The PE ratio goes down to under 19 and the Shiller CAPE ends up in the low 20s, much closer to the historical average. With valuations like that, we can again expect much more generous returns going forward! If equities return to anywhere close their historical average returns (6.7% real) in year 11, then the 10 years of lean returns may not be too damaging to our FIRE strategy!

Big ERN estimates: Ten years worth of poor equity returns, with even moderate earnings growth will move the PE ratio to below 20 and the Shiller CAPE ratio to the low 20s again!

2: Sequence of Return Risk

To deal with the Sequence of Return Risk issue, let’s look at 3 scenarios: the Boring Bogle, the Bad Bogle, and the Good Bogle. Try to say this three times in a row as fast as you can!

  1. Boring Bogle: Equity returns are exactly 4% nominal every year for 10 years.
  2. Bad Bogle: Equity returns are -30% over the next year, then flat in year 2 and then +9.8% for 8 more years. This averages out to exactly 4% compound return over the 10 years.
  3. Good Bogle: Equity returns are 9.8% for 8 years, then flat in year 9 and -30% in year 10. Again, the average return is exactly 4% p.a.
There are many paths to generate 4% p.a. over the next 10 years!

Hold on, didn’t we forget something? How about bond returns? With the assumptions above we can only simulate a 100% equity portfolio, which is not too far away from our personal portfolio but may not be acceptable for many others in the FIRE community. Well, Jack Bogle didn’t mention anything about his return assumptions for bonds, so I can “make up” my own numbers, right?

Here are the assumptions on the 10-year bond yields. In all three scenarios, we start with an initial yield of 2.2%, the value as of early June. Since then the yield dropped to 2.15% on June 6, but the difference is small enough to not materially impact our simulations,

  1. Boring Bogle: From the initial yield of around 2.2%, let’s assume that the 10Y yield climbs to 3.2% in a very gradual fashion: 0.10% per year.
  2. Bad Bogle: The yield will also end up at 3.2% after 10 years but it has to take a very different path: In response to the equity crash and likely recession early on, the Federal Reserve again slashes interest rates and probably starts some other monetary easing programs (QE4, QE5, etc.) and causes a drop in yields initially, but then we observe a rapid rise back to 3.2% by the end of year 10.
  3. Good Bogle: Interest rates rise much faster in response to the strong economic expansion. The 10-year yield reaches 4.3% in 2025 after a record-long expansion of 16 years. Then we experience a drop in yields back to the 3.2% after the Fed uses monetary easing.

The bond returns assume that you hold an ETF of 10-year Treasury bonds that constantly rolls out bonds when their maturity falls too far below the target maturity and rolls in new bonds as their maturity reaches 10 years. Notice how this is different from holding one 10-year bond today until maturity (which is not what most bond ETFs are doing). See the assumptions below:

Bond yield and return assumptions in the three Bogle scenarios. Assuming a 10-year Treasury bond ETF with a duration of 8.0.

Due to the high duration (interest rate sensitivity of the 10-year bond), we get this nice diversification benefit of the bond portfolio: Very high returns in years 1-2 during the Bad Bogle scenario and years 9-10 in the Good Bogle scenario. Exactly when the equity portfolio is down! Also notice that in the Boring Bogle scenario when bond yields move up slowly, the realized bond returns are lower than the yield. That’s because you constantly lose to the duration effect, -0.80%, which is due to the 0.10% increase in yield multiplied by a duration of 8.0. (current estimate of the iShares 7-10 year Treasury Bond ETF, ticker IEF duration is 7.51).


  • 10-year horizon, at an annual frequency.
  • Withdrawals occur at the beginning of the year.
  • Stock/Bond allocation between 50/50 and 100/0. We also throw in two equity glide path scenarios starting at 60% and 80% equities in year 1 and then shifting to 100% equities in 5% increments.
  • We look at three initial withdrawal rates: 3.0%, 3.5% and 4.0%.

The results are in the table below. We display two crucial final outputs:

  1. The final real portfolio value after 10 years, as a percentage change relative to the starting portfolio.
  2. The year 11 effective withdrawal rate if we wanted to keep withdrawing the initial amount adjusted for inflation.

Summary of results:

  • There is no hiding from the Bogle scenario. The portfolio value after 10 years will be down, and it’s mostly a matter of by how much.
  • Bonds are an even worse investment than stocks. The final portfolio value is decreasing in the bond share. If you view Bogle’s warning as a call to reduce the equity share in your retirement portfolio, you couldn’t be more wrong!
  • A glidepath with an initial bond allocation and then shifting into 100% stocks over time could serve as a hedge against the Bad Bogle scenario. Of course, if we’re in the “Good Bogle” scenario you still are better off with 100% stocks, so the glidepath scenario merely serves as a hedge against a worst-case scenario.
  • The glidepath with 80% starting point seems to have the most consistent and robust final outcome. All year-11 withdrawal rates fall into the low 4% range when the initial SWR was 3.5%. Starting with 60% bonds might be too much bond exposure because if you’re “unlucky” and the equity bull market continues for 8 years only to end in a crash in years 9-10, then the glide path from 60-100% would imply a 4.68% withdrawal rate in year 11. That may be a little too high for comfort even if the CAPE is back to just above 20.
  • A 3.0% SWR looks too conservative! The 80/20 to 100/0 glidepath ends up with an effective withdrawal rate of 3.32-3.46% in year 11. If we believe that equity and bond valuations have returned to a more normal level by then we should easily support a withdrawal rate in the low 4% range. Especially considering that we have already run down the retirement clock by 10 years.
  • The 4% initial SWR seems way too aggressive. The static portfolio allocations all end up with a 6%+ effective WR in year 11 under the Bad Bogle scenario and also significantly above 5% in Boring Bogle scenario. In year 11 you’d have two choices: Either continue with the withdrawal path and risk running out of money or significantly reduce the withdrawals at that time. Not a pretty picture!
Simulation results for different Stock/Bond allocations, Initial Withdrawal Rates and Bogle Scenarios.


The more I look at the research on Safe Withdrawal Rates the more I like the 3.5% Rule. It’s high enough to not significantly delay anyone’s FIRE plans. If you have been planning on a 25x annual spending (4% rule) you are now looking at a target of “only” 28.6x spending. Come on, that’s not so hard! And it’s low enough to weather even this unpleasant Bogle scenario.

The other lesson from this exercise: Becoming too risk-averse and lowering the SWR to 3.0% or even below may actually be too conservative! How about that? As someone who is a perennial skeptic, I finally have some good news for the FIRE community. Chill out, everybody, you don’t have to go that low. A 3.5% SWR is all you need!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

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101 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 16: Early Retirement in a Low-Return World (and why we don’t worry about Jack Bogle’s return prediction)

  1. With so much uncertainty in future returns, I decided to use the yield from my portfolio as my income to avoid having to sell shares. My portfolio of dividend stocks, REITS, MLPS, Utilities, preferred stocks, bonds from investment grade corporate to treasuries combined yield 4.5% and grows about 2-3% annually.

    Long term retirement poses too many risks like deflation or inflation and prolonged market slumps or frequent recessions. What if we go to negative interest rates. What if we experience higher inflation than in the 70s and 80s.

    Don’t you thinks it’s better to simply draw the income your portfolio produces. If yes then you would want a much larger percentage in fixed income.

  2. In all previous posts on this series, you were always pessimistic. You chose carefully which year period would make any withdrawal method not look good. Then, all of a sudden, you “conclude” a 4% pa for 10 years as not that bad. I understand you might not have an academical background, but you should use more consistent set of parameters, assumptions, estimates across all simulations comparing methods of withdrawal. And maybe you should present more averages and success probabilities while drawing generic conclusions, instead of choosing exceptions and outliers.

    1. ” I understand you might not have an academical background”

      I pretty clearly stated that the 4% still looks bad in this scenario and the 3.5% would fare better. Not sure where you see an inconsistency.
      Also, I do have an academic background: PhD in econ, studied microeconomics under Leonid Hurwizc (2007 Nobel Prize), macroeconomics under Edward C. Prescott (2004 Nobel Prize), I have numerous academic publications in top peer-reviewed journals (JPE, JME twice, JMCB). What are your academic credentials?

      1. You tried to make this 10 years of lower than average return look not so bad because “what comes after year 10” and “sequence of return risk”. In all other articles, you tried hard to find flaws in any withdrawal method different from the 3.5% (or less) withdrawal rule. This is the inconsistency I am talking about. If you are pessimistic in 10 articles, keeps this in the 11th. In most of your SWR series, you have carefully chosen periods where a method would fail, and wrote the whole article based on this, unaware (or not) that those years could be an exception, an outlier. You should calculate success ratios, averages, medians, and not choose an specific sample period to draw conclusions. You have gone deep in those outliers, adding more assumptions, drawing even more conclusions. Also, you should have the habit of using similar, if not precisely equal parameters when comparing stuff. For one article, you choose 1966, others 1968, others 2000. In one, 60/40 eq/bond, other 100% bonds. For the “academical background”, sorry. That was a huge mistake of mine. I have draw conclusions based only in what could be exceptions: your articles lacking statistical rigor. I am a mere MS. I have dropped my PhD in order to build a company who uses data science and artificial intelligence models, running currently in more than 30 millions of devices 24/7, now sold to an american corporation. There is no place for statistical distortions when you are in the wild.

        1. Your line of reasoning is completely incomprehensible. Gibberish. So, I can’t address any of your objections. Sorry, we’d just have to agree to disagree.
          Write your own blog on this topic and try to do a better job instead of lecturing others!

        2. “In most of your SWR series, you have carefully chosen periods where a method would fail, and wrote the whole article based on this”

          Yes he did (for some of his series, not most), and for this, I for one am grateful.

          By zooming in on specific periods where a method fails (i.e. outliers), we can learn a lot about the inherent weaknesses of each method.
          These weaknesses are often harder to see when looking at average results from a stochastic simulation.
          There’s little value in investigating boring/standard years; what retirees should be most interested in, is scenarios where things go wrong.

          In addition, this case study/deterministic approach offers a valuable alternative perspective to the stochastic approach that is usually looked at in the FIRE blogging community.
          For one thing, by examining a single period, or year, we can see the practical implications of each method that may have been overlooked during the method’s design (e.g. The McClung Prime Harvestig method, which involves selling 20% of stocks after a 20% gain, in one go, but not selling anything if they’ve gained 19.99%).

  3. I’m re-reading the series (It’s hot in the south, and something to do). This one remains my personal favorite! Note only do you say “yes, we can” to the naysayers always trying to throw water on the FIRE movement, and who simply cite predictions like Bogle’s without further analysis, but you provide three well thought out scenarios that show how it is still workable.

    Separately, I think the return over your retirement period so far most closely resembles “Boring Bogle,” but to me, the last 14 months in the market have been anything but!

  4. ERN, hypothetically speaking, would you think it prudent to use a high (30+) Schiller CAPE as a potential justification to choose *not* to retire at a certain time and instead stay in the workforce until the CAPE drops? I wonder about this a lot, yet also wouldn’t want to put too much stock (no pun intended) into the CAPE if it isn’t warranted. I wonder if awaiting a lower CAPE might help minimize Sequence of Returns Risk. Thanks!

  5. It’s January 2023, and why does it feel like we’re in year 2 of the Bad Bogle scenario already, e.g. year 2022, S&P down 20% minus inflation 6.5%, close to -30%…

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